Dilemma on tariff model for Karuma and Isimba

In Summary

· The Power Purchase Agreement (PPA) it signed, however, provides for an energy charge

· Karuma’s generation tariff will be $0.497 (Shs179) in the first 10 years after commissioning

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By Nelson Wesonga

Uganda Electricity Generation Company Limited (UEGCL) has come to a head as regards how to charge electricity consumers to repay the $1.4 billion (Shs5.1 trillion) Karuma hydropower plant loan.

Whereas the Power Purchase Agreement between UEGCL and the Uganda Electricity Transmission Company Limited (UETCL), which buys bulk power from generation companies and sells to distribution companies, provides for an energy charge, UEGCL wants capacity payment.

A capacity payment is where the generation company is paid for what it could have generated and sold but might per se not have generated and sold.

On the other hand, an energy charge is where a power generation company is paid for the units it generates and sells.

UEGCLsays it wants a capacity payment because the loan agreements between it and the Export Import Bank of China provide for capacity payment.

It claims the PPA, too, provides for capacity payment, a claim a Finance ministry official – who requested not to be named for them to speak on the matter – says is a half-truth.

UEGCLsays should an energy charge be applied, the company would take longer than 15 years to repay the principal.

Consequently, even after the 15–year–tenor of the $645.8 million (Shs2.3 trillion) tranche of the loan expires, UEGCL might continue paying the 4 per cent annual interest on the outstanding principal.

The interest rate on the 20–year–tenor tranche ($789.3 million/Shs2.8 trillion) is 2 per cent per annum.

When the Daily Monitor asked UEGCL about the tariff model, UEGCL’s corporate affairs manager, Simon Kasyate, said the company wants a capacity payment.

“Capacity means even if my plant does not run, but I would have run had there been demand, I charge you for that.”

For illustrative purposes, where the Karuma hydroelectricity plant could generate 600 megawatts (MW) but UETCL needs, say, only 200MW, UETCL should, given Karuma’s plant factor of 67 per cent, pay for 402MW even if it (UETCL) will take only the 200MW.

Capacity payment is the model the government is using to pay for Bujagali hydropower plant’s power.

The rider, in the case of capacity payment, is that an electricity generation plant should be able to generate up to its plant factor or the installed generation capacity should UETCL request for more power.

With only 20 per cent of the population accessing electricity, suppressed demand below the installed generation capacity, charging $0.0497 (Shs179) per unit means UEGCL will take longer to collect the $1.4 billion from the existing customers.

Baring these, UEGCL, on whose behalf Sinohydro Corporation Limited is constructing Karuma hydropower plant, said it is now engaging the Electricity Regulatory Authority (ERA) to approve capacity payment for Karuma.

The company also wants capacity payment for the Isimba hydropower plant.

Attempts to reach ERA’s consumer and public affairs manager John Julius Wandera for comment failed.

Mr Wandera is reportedly out of Uganda.

ERA’sprincipal communications officer Diana Nambi, on the other hand, refused to discuss the issue since, she said, she is on leave.

UEGCL’sloan repayment dilemma could be traceable to a September 4, 2014 policy directive by Energy minister Irene Nafuna Muloni.

Through the directive to ERA, Ms Muloni said as far as Karuma, Isimba and Ayago hydropower projects are concerned; the regulator’s licensing procedures would not apply to UEGCL until after the government had persuaded the EXIM Bank of China to lend Uganda money to finance construction of Karuma and Isimba.

Her explanation was that the government had already procured the feasibility studies, construction works and supervision services.

“UEGCL will apply for the licenses after attainment of financial closure of the projects under which the generation plants will be operated,” Ms Muloni said then.

“Applicable tariffs for the 600MW Karuma hydropower plant, the 183MW Isimba hydropower plant and the 600MW Ayago hydropower plant will be determined by ERA as provided for in the Electricity Act 1999…”

UEGCLin 2016 finally applied to ERA for a power generation and sale license.

And in January this year, ERA issued to UEGCL the license.

While approving the $0.0497 (Shs179) per unit tariff for Karuma for the first ten years, ERA said the applicable tariff and the tariff adjustment methodology has been determined to reflect the energy service costs and incentive for improving operating efficiency.

According to the license, the tariff has been designed to generate enough revenue equivalent in aggregate to the sum of allowed costs of debt service obligations, operation and maintenance costs of Karuma HPP.

The tariff has also been designed to generate revenue to respect of repayment of government equity and the license, Directorate of Water Resources Management, and the National Environmental Management Authority fees.

Though Karuma and Isimba power plants are unlikely to be commissioned next year when they should have, UEGCL is now concerned once they are completed in 2019, and it should within two years start repaying the loans.

Therefore, any contradictions in the documents pertaining to the plants should be addressed pronto.

One of the options to address the contradiction is to modify UEGCL’s license to generate and sell electricity.

An application for a modification could be initiated by a licensee or the regulator.

Section 44 of the Electricity Act, 1999 says where, in the opinion of the a licensee, a condition of its license has become unduly onerous and is impacting on its ability to fulfil its obligations under the license, it may apply in writing to ERA requesting that the license be modified.

To that effect, the license points out the provision of the license it wants to be modified, the justification for the modification, the proposed modification and any other evidence in support of the modification.

The regulator could approve the application to modify the licensee, and thereafter make the modification or it could reject the application.

Whatever its reasons for a rejecting a licensee’s application, the authority would have to inform the licensee why it decided as it did.

Where the authority approves the application to modify the license, it should inform the public via a widely circulating newspaper.

The authority should then invite the public to make presentations or objections to the authority; this should be done within 30 days of the regulator acquiescing to the application for the modification of the license.

In case there are many persuasive objections to the modification of the license, the authority should ask the licensee to furnish it with more reasons justifying a modification of the license.

Should the licensee be displeased with the regulator’s decision on the modification of the former’s license, then the licensee is free to apply to the Electricity Disputes Tribunal for a review.

According to Section 43 of the Electricity Act, 1999, ERA may modify the terms and conditions of a license if the benefits of the public interest of such modifications significantly exceed the disadvantages of the licensee.

As the regulator and the key players in the electricity sector now meet to resolve the matter, it should be pointed out that once the Karuma and Isimba hydropower plants, which will altogether contribute 783MW to the national electricity grid, are commissioned; there will be excess generation capacity.

Currently, Uganda has an installed generation capacity of 873MW.

Suppressed demand during the peak hours – 6pm to 12am – and even with exports to Kenya, does not exceed 600MW.

In other words, with the current installed generation capacity, there is already an ‘idle’ 300MW.

According to electricity distribution company Umeme Uganda Limited, in the course of the next two years suppressed demand by manufacturers – who use seven of every 10 units of the electricity distributed in Uganda – will be just an extra 449.5MW.

That 449.5MW includes the projected 200MW the phosphates factory in Tororo District in eastern Uganda will consume in the course of its life.

Put differently, the current ‘idle’ 300MW and Isimba’s 183MW could meet that suppressed demand by the manufacturers.

Different reasons explain the low uptake of power from the generation plants.

One is that there are few large electricity consumers.

They are few because fewer would–be entrepreneurs are setting up shop here.

Many are kept off by reports of corruption, which adds to the cost of doing business here, lengthy registration procedures for businesses and – though there is no minimum wage – comparatively high cost of labour, bad rail and road networks and high–end user electricity tariffs.

Two, as regards would–be domestic consumers, the inspection and connection fees – which range from Shs139, 300 and Shs367, 300 for Umeme’s prospects, prevent or delay many an average household from connecting, and thus, consuming electricity.

Also, though the transmission and distribution lines now reach up to 90 per cent of the local government district headquarters, they do not go beyond the headquarters to nooks where households could have connected.

In as far as unlocking constrained demand here is concerned; it does not help matters that Kenya is constructing a high voltage transmission line from Kenya to Ethiopia from where Kenya could get electricity at $0.03 (Shs107.2) per unit electricity.

Shs107.2 is Shs43 less what UEGCL will charge for Karuma HPP’s power in the first 10 years after its commercial operations date, starting in the year 2021.

Uganda cannot even count on selling substantial quantities to Tanzania because Tanzania has embarked on exploiting its coal, natural gas and renewable energy resources to increase its power generation capacity to meet suppressed domestic demand.

Besides, Tanzania’s end-user power tariffs are comparatively lower than the other East African Community members states’ – so it would not make economic sense, unless of supply challenges at home, to import more expensive power.

Considering all these, UEGCL says it needs an assured stream of revenue to repay the $1.4 billion Karuma HPP and the $482.5 million (Shs1.7 trillion) Isimba HPP loans.